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January 1, 2012 By Gary Rivlin

We all know the drill. Threatening letters that arrive in the mail, a phone that constantly rings.

But Alexis Moore needed a job, and needed one fast “if I didn’t want to end up living on the street,” she says. Moore vividly remembers her first day working as a bill collector. A manager handed her a spiral notebook of “talk-offs”—sample scripts—and then, after a short pep talk about daily quotas, “let us loose,” Moore says. Sixty people sat crammed into a small Sacramento, Calif., office, each working the phone in a cramped cubicle, overseen by a single supervisor who prevented collectors from breaking the rules—or sometimes ensured that they did.

“Every day I was on the job, I was asked to break the law,” says Moore. She primarily called debtors living in California, where strong consumer laws protect people from harassment. Yet when someone would hang up on her, “I would get direct orders to immediately call that person back”—and to keep calling until they talked. Federal law strictly forbids a debt collector from informing a third party—a close friend, a co-worker, even a parent—about a debt, but Moore’s bosses told her to ignore that, too. “When we couldn’t reach someone, we were instructed to contact a neighbor and ask them to pin a note to a person’s front door, saying to call us because they owe us this money,” says Moore. The collectors were even ordered to phone people’s relatives to try to enlist them in the cause. “Those who didn’t like it were told, ‘You’ll do what it takes or you’ll find another job.’?”

“The ones who weren’t good at collecting were under constant pressure,” Moore says. “Their supervisors would tell them, ‘Fucking threaten them if you have to, just collect the fucking money.’?” (As she says, “the ‘f-word’ was used all the time.”) Moore wasn’t fluent enough to handle collections in Spanish, but she understood the language well enough to know that at least a few of her co-workers were threatening debtors with deportation. Others would intimidate people by saying, “We know where you live so you better pay up.” Moore worked the phones for five years at various collection agencies before setting herself up as an industry consultant.

These days there’s no shortage of potential business for Moore. Think of the country’s bill collectors as the people who clean up after the parade. The prolonged binge of overconsumption that Americans enjoyed through the great crash of 2008 means there’s plenty of bad debt to go around. Credit-card companies alone charged over $100 billion in 2010—and that doesn’t include all the money people owed directly to hospitals, cellphone carriers, auto lenders, and a long list of other businesses. And of course this time of year means many consumers are feeling a financial squeeze, especially after a busy holiday retail season.

Though these should be rich times for the debt-collection industry, it’s not easy prying money from people who simply don’t have it. Collection rates are way down since 2008: according to one industry estimate, where debt collectors once recouped 30 cents of every dollar owed, they’re now bringing in 20 cents. And with their profit margins shrinking, many collectors are putting an even tighter squeeze on those in the red.

Is it any wonder, then, that the Federal Trade Commission receives more complaints about debt collectors than any other industry—or that earlier this year the agency reported a threefold jump in grievances since 2002? More than 50,000 people contacted the FTC in 2010 to complain about severe harassment—a 25 percent increase over the number in 2009. Another 18,000 complained that a collector used obscene or otherwise abusive language (a 22 percent jump in just a year), and more than 4,000 consumers said a collector threatened them with violence—a startling 66 percent rise. “That’s just the tip of the iceberg, as far as I’m concerned,” says Sergei Lemberg, a Connecticut attorney who represents debtors who believe they’ve been abused by collection agencies.

Making matters worse for consumers: the growth of a new breed of collector called the debt buyer. These days, only a small fraction of debt collectors actually work on behalf of the original business that’s owed money. Eventually, the hospital or cellphone company you stiffed grows tired of sending letters insisting you pay your bill; a bank can hound you for only so long about delinquent credit-card charges before, by law, it must write off the debt as a loss (typically at six months). Sooner or later, the creditor will sell off its bad debt to a debt buyer for 2 cents on the dollar, or 5 cents or 10 cents, depending on the age of the debt and other factors.

The big difference between debt buyers and the front-line collection agencies hired by banks and hospitals is that the agencies don’t actually own the debt portfolio they’re working; they receive commissions that typically range between 25 cents to 50 cents for every dollar they collect (the older the debt, the higher the commission). But debt buyers have skin in the game: a buyer who pays, say, $50,000 for a $1 million portfolio of credit-card debt faces financial ruin if he or she can’t recoup at least two times that purchase amount to cover the overhead.

“The chances of abuse go way up when a collector has a financial stake in the outcome,” says Jerry Jarzombek, a Dallas-based attorney who has carved out a living pursuing debt collectors and debt buyers who bend the law. “You see these acts of desperation, especially from these smaller players who have their life savings tied up in a portfolio. Then it’s a ‘shoot from the hip, grab what you can, do anything to get it’ mentality.” In that circumstance, the debt buyer is not that different from the debtors their people are heckling. The debt buyers, too, have bills they can’t cover, and they aggressively work the phones in the hopes they can convince people to pay up.

When a debt buyer isn’t able to collect on the bad debts, he or she will most often sell the portfolio to someone else. In fact, debt is bought and sold so often that debt buyers have created a vocabulary for describing the age of their portfolios. For instance, “tertiary” (“tersh” for short) is what insiders call a portfolio already picked over by three debt buyers; “quad” debt is a portfolio that has been worked over four times. Then there’s the term critics have dubbed for an old bill that never seems to die: “zombie” debt.

“You hear these stories all the time about people getting a call about debt that’s five years old, 10 years old,” says Michelle Dunn, a longtime debt collector who has written a series of advice books for people wanting to get into the debt-collection business. “They’ll say, ‘I can’t remember it, send the documentation’—but then they don’t hear about it again until three months later.” At that point, another debt buyer has taken over the account, “and now their phone starts ringing again and they’re going through the whole thing all over again.”

“It can go on and on and on like that for years,” Dunn says. “It’s ridiculous.” The price goes down each time a portfolio is resold—but each new debt buyer remains hopeful that his collectors will succeed where others have failed.

“The debt buyers are the bottom feeders of this industry, as far as I’m concerned,” says Jerry Ashton, a debt collector with 30 years’ experience.

The early days were fat and happy ones for those daring to risk their own cash buying bad debt. One trailblazer, Kiersten Andrews, remembers spending just $10,000 in the late 1980s to buy $1.5 million in credit-card bills from Bank of America—and raking in somewhere around $800,000 from the creditors on her list. Another early pioneer, Ezra Zucker, paid $50,000 for his first portfolio of debtors and ended up collecting $200,000 inside of just 16 months. Small wonder, then, that private investors and hedge funds were soon lining up to bankroll Zucker’s future purchases. In 2003, the year of his first purchase, Zucker was a one-man operation with nothing but a PC. Now his company, Bitach Capital, has offices in Miami, Denver, Atlanta, Minneapolis, and Jerusalem, and employs roughly 150 people.

With time, the banks and other businesses on the sell side did a better job of pricing their debt, cutting into the profits of buyers like Zucker. The competition also stiffened as more people—and more money—gravitated to the industry. As many as 2,000 debt-buying companies now operate in the U.S., some of them publicly traded behemoths with 1,000-plus workers.

David Paris is probably not the person who comes to mind when conjuring up the type of man making a living in the strange but financially rewarding business of buying old debt. With closely shorn hair and thick-frame glasses, Paris, 46, shows up for an interview wearing a blue blazer over a sweater vest. A would-be painter, he earned a bachelor of fine arts in college and made a decent living for several years working for a sculptor. “But it’s the old story,” Paris says: he got married, they began talking about kids, and “I needed to make a few more dollars, so I started working at a collection agency part time.” That was in 1990. Seven years later Paris and a fellow employee ventured off on their own, teaming up with investors willing to front them the cash to buy portfolios of bad debt.

Like most debt buyers, Paris says, “we work further down the stream.” He prefers to buy secondary debt, but he’s not averse to tersh or even quad debt. On occasion, he’s been known to buy “warehouse debt,” which is debt so old “we’re not counting anymore,” Paris says.

Those in his employ, Paris says, never use some of the more underhanded methods of his less savory cohorts. He doesn’t allow his collectors to “friend” people on Facebook just to learn more about their lives. Nor, he says, does he allow his employees to trick debtors into inadvertently extending the statute of limitations on the money they owe. Make a token payment to show you’re trying, some collectors might purr sweetly to a debtor, failing to mention that even a nominal payment resets the expiration date on a debt, which ranges between three and 10 years, depending on the state.

Yet while Paris might have more scruples than some, he’s still the third or fourth or fifth collector taking a whack at an account. He doesn’t bother buying the paperwork that would substantiate the data contained in the spreadsheets he buys from other debt buyers because, he explains, that bumps up the cost of the purchase and therefore eats into the bottom line.

“If people owe a debt, they owe the debt, and we’re going to do what we can to try and collect that money,” says Paris, who sees nothing wrong with collecting on an unpaid bill long after the state statute of limitations has expired. “Maybe they say, ‘You know what, I can handle it now. I’d like to take care of my obligation,’?” Paris says. “Why shouldn’t I be able to offer them that opportunity?”

Some people, of course, never intend to settle their debts. There are bad actors on either side of the debtor-collector relationship. “I’d get men yelling at me ‘Who the hell do you think you are, bitch?’?” says Michelle Dunn, the longtime debt collector. “People would say, ‘I’ll find out where you live, where your kids go to school.’?” Others just can’t find the means to pay up. In the eight years she ran a debt-collection agency, Dunn’s clients included veterinarians, dentists, hardware stores, and heating-oil firms. Small businesses like these are struggling through hard economic times just like everyone else.

Then there are people like Brian Reynolds, 23, a former chicken fryer at Bojangles’. He has a complaint against his credit-card company for lowering his credit limit after he’d already surpassed it and then hitting him with steep monthly penalties. Tired of the fees, Reynolds decided he would pay nothing. Since then, it’s been mainly an endurance test: yet another debt buyer picks up his debt, his phone rings off the hook, then a few weeks pass and his trailer in Havelock, N.C., goes quiet again. Still, after a couple of years of this routine, he grew fed up; this October, he hired a lawyer he found on the Internet. Now the debt buyer must either sue or hope some other buyer is willing to take a crack at Reynolds’s case.

“Do you sue the 22-year-old working at Arby’s?” asks John Pratt, a debt buyer based in Columbus, Ohio, and coauthor of Debt Purchasing: An Investor’s Guide to Buying Debt. Sure, it bothers him, all those people who bought flat-screen TVs they now can’t pay for. But Pratt says: “Do you sue the 62-year-old greeter at Walmart? You don’t because it only adds to your cost of doing business.”

How rampant is abuse inside the debt-collection industry? Paris, for one, feels the problem has been greatly magnified by a media that unfairly puts the spotlight on the industry’s worst abusers. Yes, debt collectors from Advance Call Center Technologies did leave a series of racist messages on the mobile phone of a Dallas man named Allen Jones. “Get your motherfucker nigger ass up and go pick some motherfucker cotton,” said one collector in pursuit of the $200 Jones owed on a bill. (A jury awarded Jones $1.6 million in damages.) Still, says Paris: “You can bring a plumber to your house and he can rip you off. Does that make all plumbers bad?”

But even some within the industry believe abuse is endemic. Moore says she’s seen the inside of enough operations to know that what she experienced in Sacramento was hardly an anomaly. “The kind of stuff I saw first-hand goes on everywhere all the time,” she says. “You’ve got criminals working in these places ... You’ve got drug and alcohol abusers. Basically, if you have a Social Security number and can sign your name, you’ve got a job.”

Then there’s the problem of sloppy record keeping. Pratt, the Columbus, Ohio–based debt buyer, knows he should be able to tell debtors precisely how much they owe in charges and how much they owe in interest and penalties—but he can’t, at least not with every portfolio he buys. The chain of title grows more unreliable every time a portfolio changes hands. When a portfolio is more than two or three years old, “that’s where we really see the worst abuses,” says Pratt.

David Mullins is one of the unlucky ones. For Mullins, a 57-year-old from the Baltimore area who lays cable for Comcast, the nightmare began when the financing arm of General Electric mistakenly hit him with $1,300 in charges on a carpet purchase he and his wife made in 2004. Mullins has a letter from the carpet company saying he had been wrongly charged. He has a second letter from the Maryland attorney general’s office saying the same. Yet that hasn’t made any difference to the various collectors who have harassed him for the money a spreadsheet shows he owes them. “They call our home incessantly,” he says. “They call my cell constantly, they call my wife’s cell constantly.” Mullins is hard to reach at work but no matter: “They call my wife at work all the time.

“They’re like a schoolyard bully,” Mullins says. “They try to break you down so eventually you send them something just to make them go away.”